Ironing out the tough times

Disappointing Chinese trade figures continue to affect the Australian currency, with the Australian dollar edging towards a six-year low, trading at US75.89c at 5pm (AEST) today. With multiple markets feeling the pinch, proactively planning for these tough times is key to coming out on top.

As written by the Sydney Morning Herald'sVesna Poljak, the next commodities boom is "a generation away" for some key raw materials, and it is the commodity economies – such as Australia – that will provide the more compelling tactical opportunities to go short as the bubble deflates.

That's the view of Atul Lele, chief investment officer at Deltec, the private bank and wealth manager, who takes a negative view toward iron ore and the industrial metals but remains favourable on agricultural commodities. Even taking a long-term view, "all commodities are expensive".

Iron ore has no credible prospect of a rebound in either the short- or medium-term, a blow for Australia's materials sector. Mr Lele's forecast comes a day after Treasurer Joe Hockey acknowledged the prospect of a $US35 a tonne iron ore price which is the equivalent of a $6.25 billion hit to federal budget revenue in the space of five months.

In December, the government was counting on $US60 a tonne iron ore. Iron ore futures are trading at around $US48 a tonne.

"A still weak Chinese residential property market and poor steel industry fundamentals have led to a cyclical downturn, with rising supply of iron ore likely to lead to a structural downturn," Mr Lele said, in the context of a broader macro theme where the United States dollar is stronger and emerging markets are facing a sharp slowdown.

The momentum in steel production growth – "all that matters for iron ore prices" – was also suggestive of weak value for iron ore. The strategist forecast further declines in the iron ore price and for the share prices of iron ore producers which include BHP Billiton, Rio Tinto and Fortescue Metals Group. Already, smaller producer Atlas Iron has turned to asset sales in distress.

Mr Lele's said that in theory, iron imports by China should rise as the cost of producing iron ore by the Chinese becomes less attractive. "Chinese iron ore imports are below trend, suggesting either iron ore imports to rise, or steel production to be significantly lower going forward – likely the latter," he added.

Deltec is also cool on the outlook for gold both as a store of value and as a safe haven asset, seeing better opportunities elsewhere. Energy however looks set to rebound later in 2015 as global growth improves, stimulating demand, but for the oil price the recovery will be "muted" because oil producers will rush to pump.

Not all experts are bearish. HSBC's chief economist in Australia, Paul Bloxham, said that looking beyond further short-term pain there was good reason to be more optimistic about commodities but with a nod to differentiation favouring "higher grade" hard commodities such as nickel, and foods such as sugar. In a production sense, the low-cost economies including Australia in the case of iron ore will benefit from higher-cost producers exiting the market. This is a medium-term theme.

"The super cycle is probably over, meeting an earlier demise than we had expected," Mr Bloxham said. "The rise of [emerging markets] means that global GDP growth should remain more commodity intensive than it was a few decades ago.

"Amid all the recent volatility and headlines, it is also important to keep some broader trends in perspective - most of which suggest that the sector will still face relatively robust demand growth in years to come."

It is the opinion of PlantMiner that taking the above into account, the need to embrace new, innovative technology to ensure that business practice becomes more efficient is paramount. Rio Tinto’s Managing Director, Chris Salisbury, recently echoed these thoughts at the Legends of Mining Lunch in the Hunter Valley last month.